Debt consolidation basically rolls high interest debts
including credit card bills to a low-interest and single payment. It may also
reduce the total debts and reorganize it so you can pay it faster. If you are
dealing with an amount of debts and just like to reorganize different bills
with various due dates, interest rates, and payments, debt consolidation is an
approach you may tackle by yourself.
Debt Consolidation –
How It Works?
There are 2 primary ways of consolidating debts. Both of
these focus your debt payments to a monthly bill:
- Get debt consolidation
loan that has fixed rate. You can use the cash from loans to pay off
debts. Then, you may pay back the loans in installments for a particular
term. - Get zero percent interest
and balance-transfer credit card. With this, you can transfer your debts
to this card and pay balance in full during the period of promotions.
The other ways of consolidating debts take out home equity
loans or 401(k) loan. But, such options may involve risk to your retirement or
home. In any case, a good option for you basically depends on your profile and
credit score and your debt to income ratio.
When is the Time to
Consider Debt Consolidation?
Success with consolidation strategy needs the following:
- You need a plan to avoid
running up debts again. - Your cash flow covers the
payments consistently toward your debts. - Your credit is enough to
qualify for low interest debt consolidation loans or a zero percent credit
card. - Your overall debts
excluding mortgage does not exceed forty percent of gross income.
For instance, you have 4 credit cards with the interest
rates that range from 18.99 percent to 24.99 percent. You make payments on
time, so credit is great. You could qualify for unsecured debt consolidation
loans at seven percent, which is a low interest rate.
For a lot of people, consolidation may reveal a light at the
tunnel’s end. Once you take loans with 3-year term, you know that it’ll be paid
off in 3 years. On the other hand, making some minimum payments on the credit
cards might mean years or months before they are paid off while accruing more
interest compared to the initial principal.
The Bottom Line
The primary reason you must consolidate your debts is if you
have gotten in your head and willing to make some changes to your spending to
get back above water. It may a useful tool for simplifying your payments, make
faster progress on balances, and pay less interest. However, if you do not
change your behavior that got you to this mess, having a new credit line will
not change anything and might dig you deeper to debt.
Once you have decided to consolidate debt, you might like to
pay off your outstanding debts in several months or a year and definitely no
more than 3 years. If you cannot pay it in 5 years, it could be time for
bypassing consolidation and think of talking to the bankruptcy lawyer. It is
also essential to note that debt consolidation is not for everybody. However,
for some, it may be a shrewd move to get all of your finances back on track.
